This is a guest post titled “Need Based Financial Analysis – Are you investing the right way?” by Jayant Bhat. He has over 7 years experience in life insurance and reinsurance field as a Senior Financial Underwriter and Risk Analyst. By looking at the immense amount of questions being posted on this blog by various readers, I have invited Jayant to write a guest articles. I am glad he has agreed to write various things that an individual must know when it comes to finance and investment.
The New Era, the one which saw Liberalization, Globalization and (a new word=>) Agentization. Agents have always been needed to fulfill our needs. However, the advent of private life insurance companies saw unprecedented recruitment of agents or a sheer misnomer used for agents “Advisers”. The thirst for growth and thereby sales was so high that the recruitment of Advisers happened manifold on an ad-hoc basis. The training module is for namesake and most of the agents usually sell the products which are but obvious rewarding to themselves. Most of the agents are part time and have very little knowledge of financial planning. Though they got the designation of Financial Advisors they were actually selling or should I say (mis)selling the incorrect life insurance products.
The onus lies on you to safeguard yourself. Not the one who is selling. Basically, you need to get yourself analyzed financially. What I mean is get a need-based financial analysis done. You need to have brainstorming sessions with yourself.
Before deciding to buy life insurance or for that matter before any investment, ask yourself two major questions:
1. What if you live?
2. What if you die?
I mean ask yourself do you have enough provisions of cash which will support your short term, medium term and long term needs. Ask yourself; tomorrow if god-forbid something unfortunate happens to you, then do you have sufficient life insurance cover so that your dependents can almost lead the same quality life without you? I understand that without main person of family there is a huge lacuna, but life has to go on and your kids & spouse need money to lead a good future life.
Hence, first think of buying an insurance product. Now this insurance product should offer you enough Life cover and this should not be considered as investment product at the first instance. Say you buy an insurance product with an intention of savings first and then in about 2 years from now there is some emergency wherein you require money urgently then you would be shocked to hear that you cannot withdraw ULIPs for min 3 years. Also, there is huge loss if you want to withdraw money after three years. Hence saving should first be in FD’s, RD’s, etc in which at least principal is guaranteed in case of emergencies. This should be your short term goal.
What if something unfortunate event of death happens: Suppose your current income is 10 lacs per annum. Then within age of 40 when kids are very young and esp if spouse is a homemaker plus dependent parent/s, then you should have a minimum life insurance cover of 1.0 crore. Logic is if your family receives 1.0 crore claim from Life Insurance Company and that money is kept in FD, your family gets somewhere between 8 to 10lacs per annum without any risk. This amount should easily justify and continue the same life style and education needs which you would have provided during your life.
Few points to ponder:
* First priority: Always buy a Term insurance offering a higher life cover with a small premium. Never opt for traditional Term insurance with return of premium as they work out to be costly.
*While buying a term product: Do not buy a term product in a hurry as you would not get anything if you survive the period. Do a thorough market comparison. Personally, I would not shell out even 100 Rs extra for my own life insurance policy.
*Never Go for Traditional Endowment/Money back policies as they prove to be very costly in todays urban/semi urban scenario.
*If you are having Risk Taking ability and minimum 10 year premium paying capacity under all good and bad times, then go for Equity based ULIP which offers you both higher life cover and good account value with minimum upfront charges. Generally, amidst all ups and downs of share market, the net result at the end of 10 years should give you minimum 15% returns per annum. ULIPs will offer you good returns over longer term in addition to life cover. All the maturity benefits I am sure you are aware that the returns in ULIPs can never be guaranteed and they are always speculative. Never withdraw money from ULIPs when market is down.
* It is wiser to invest in Safer Debt Based ULIP(max 65% in debt funds and 35% un Equity), if you do not wish to take undue risks.
*Always invest in PPF and this would prove very beneficial when you actually retire. PPFs have a lock in period of 15 years.
* As of now do not invest in any pension plan as government in final stages of setting a Pension Fund Regulatory Authority and the new guidelines would prove beneficial to wait for those who delay their pension plan especially when we all salaried have provident funds. Returns from Pension funds are mostly taxable and hence think twice before opting for a pension plan.
To sum up: of the total income, First have 5% liquid cash in savings account, 15% in FD or RD, invest some amount in PPF or Postal savings with 5 year lock-in period, simultaneously opt for term insurance and safeguard your family, invest in additional mediclaim, then opt for other investments like mutual funds and ULIP’s. Never take insurance on your kids name. One last point, when you realize and identify the need JUST DO IT and NEVER DELAY DECISIONS TO BUY LIFE INSURANCE as with each passing year premiums go on increasing.
Very soon, we will start a series which will explain details of various types of Insurance as well as other investment modes.
Rakesh Jhunjhunwala says
Hi,
Great article, I really like your style of writing. You provide ample amount of information in few words. Keep sharing such informative article.
Rakesh Jhunjhunwala says
Hi,
Great article, I really like your style of writing. You provide ample amount of information in few words. Keep sharing such informative article.
Ameya Phadke says
Hi!
Please write an artical on Home Loan/Finance – Do’s and Don’ts
I know, This request might be strange and not related to above Topic; however I tried to find an Artical on ” Home Loan ” but I could not find any on u r Blog.
If you could put some more light on this Topic, then tht would be gr8!
Thanks,
AP
Mohan says
I have that in mind. I can share my own experience to provide you folks a better understanding of home loans. Let me plan for a post on that soon. Thanks for bringing in that topic. In the mean while feel free to go through other finance related articles on this blog. I am sure, you will appreciate them.
If you haven’t subscribed to this blog already, feel free to sign up for email notifications. That will help you stay tuned with latest articles as they get published on this blog 🙂
Preeti says
I recently read an article on Mohan’s blog about Home Loans. I think he has already put that up. go read it!
Balaji says
Very insightful article!
Sad thing is i’ve almost put 70% of my investments on Endowment & Money back plans- 65% of this was invested within last 4 years & the rest about 8 years back. Also i don’t have a term insurance. Is it wise to surrender these policies & opt for a term insurance policy? or should i continue with these for few more years?
Please advice.
Jayant Bhat says
Dear Sir,
Long term Investment in any ULIP or mutual fund would always surpass Inflationary rates and hence you would get more returns than most of the other investment plans. I have a feeling that year 2010 would be a year of consolidations in all respects i.e. jobs, equity, gold etc and thereon once again we would see beginning a contrast of economic slowdown. means a good time is to dawn in coming years.
Never go by anybody’s words as far as returns in ULIPs are concerned. Book partial profits at every regular interval and keep those profits in some safe custody like FD’s. Markets are like child swings so never expect only ups or only downs.
Hold on with your investments, invest more if possible. Dont diversify into too many segments or products. Look at increasing like cover too.
Sunil kumar mohanta says
Already I have spent 6lakhs in SBI smart ulip .So what is the total return I will get after 10 yrs? Pl. reply me soon kindly.
Sunil
Sunil kumar mohanta says
Already I have spent 6lakhs in SBI smart ulip .So what is the total return I will get after 10 yrs? Pl. reply me soon kindly.
Sunil
Saumen says
Thanks Mr. Mohan for your thoughtful writeup. For last few weeks, i am going thru yr blogs…and find those interesting…
As an IT(Information Technology) professional, for last few years, I am working in gulf. Back in Delhi, we are in a joint family structure… I am 39 plus…. I feel, I could take better decision, if I could get your article earlier… “Never take insurance on your kids name”….as already i took… 1) Metlife Child plan and 2) LIC komal jeevan for my child who is 2 plus years old) …….
No time is late, as I am shaping up my Nephew(sister’s son – 22 years, working in Delhi) financial plan as per your recomendation.
Also, please provide your expert decisions on “Dividend Yield funds” for investments.
I shall request you, if possible, please provide blog on Financial planning
1. specially for NRI s ….. and
2. Senior Citizen (60 plus years)…
Wish you best of luck….God bless U !!
Mohan says
Dear Saumen, thanks for being a regular reader and sharing your thoughts. Sure, I will keep the suggestions you have made while writing finance related posts in future.
Manish says
I like the way author has put it as “You need to think about two things, What if you die and what if you live”, that’s how a person should start thinking 🙂 .. Liked it 🙂
Mohan says
Yes, Jayant is a financial adviser and he is a guest author on this blog. Pretty soon, one more article would be published here! Stay tuned 🙂
Shraddhanandna says
Hi All,
Savings up to 15% in FD or RD…here is a new plan offered by Corporation Bank Lakhpati Recurring Deposit which offers you a good returns for example,
Deposit Period Monthly Installment* Maturity Value*
1 year 8025 100,278
2 year 3850 100,190
3 year 2475 100,910
4 year 1775 100,575
5 year 1375 101,560
6 year 1100 101,728
7 year 900 101,369
8 year 750 100,835
9 year 650 102,738
10 year 550 100,989
with Insurance cover of Rs.1 lakh for life of the depositor under CorpJeevan Raksha at the option of the Depositor, subject to the opening of SB / CLSB / Current Account in the name of individuals.
For further details do visit the Corporation Bank website under the head Personal and select Lakhpati Recurring Deposit scheme.
Well it depends on individual earning capacity on the amount of money he would like to invest and the returns he might expect from the scheme.
ashwani bansal says
Thanks,
Mohan i am really thankful to you for this great information before investibg .i was interested to take ICICI RGF plan but after your views i change my decision
Mohan says
@Ashwathy Nair
You are welcome. Thanks for the info. I will soon start a photo blog 🙂 Better watch out.. I might be your good competitor!
Ashwathy Nair says
Thanks for your visits and comments. I post-processed the tulip shot with Picasa (for the soft-focus effect!)
Mohan says
@Allen Taylor
Thanks!
@Ashwathy Nair
Thanks & you may want to subscribe to email/rss feed 🙂
Mohan says
@Allen Taylor
Thanks!
@Ashwathy Nair
Thanks & you may want to subscribe to email/rss feed 🙂
Ashwathy Nair says
Interesting and insightful post!
Allen Taylor says
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
Allen Taylor says
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor